The hung parliament is credit negative because it could
lead to new elections and even a second vote might not resolve
the gridlock, Moody’s said in a report dated yesterday.

“Instead of increasing visibility on the country’s
political direction, Italy’s recent elections raised the risk
that the structural reform momentum achieved under the
government of Mario Monti will stall, if not come to a complete
standstill,” Moody’s analysts including Frankfurt-based Dietmar
Hornung wrote in the report.

Turmoil in Italy, the region’s third-largest economy and
biggest bond market, risks spilling over into the currency
bloc’s weaker sovereigns including Portugal and Spain,
“potentially reigniting the euro area debt crisis.”

Pre-election favorite and Democratic Party leader Pier
Luigi Bersani won the lower house by less than a half a
percentage point, while ex-Premier Silvio Berlusconi gained a
blocking minority in the Senate after the Feb. 24-25 vote.

Berlusconi and former comedian Beppe Grillo both campaigned
against austerity measures implemented by Prime Minister Monti
and won about 55 percent of the popular vote.

Yield Surge

Italian 10-year bond yields climbed 41 basis points
yesterday to 4.88 percent, the biggest advance in 14 months.
Italy seeks to sell as much as 4 billion euros ($5.2 billion) of
a new 10-year bond today, along with 2.5 billion euros of a 5-year benchmark note.

The 10-year rate reached 6.71 percent in July as concern of
contagion in Europe’s debt markets spread, nearing the 7 percent
level that prompted Greece, Ireland and Portugal to seek
international rescues.

Yields on sovereign securities moved in the opposite
direction from what ratings suggested in 53 percent of 32
upgrades, downgrades and changes in credit outlook last year,
according to data compiled by Bloomberg published in December.
That’s worse than the longer-term average of 47 percent, based
on more than 300 changes since 1974. Investors ignored 56
percent of Moody’s rating and outlook changes and 50 percent of
those by S&P in 2012.

Moody’s said it would consider downgrading Italy if there
was a material deterioration in the nation’s economic prospects
or reform efforts. Difficulty in accessing public debt markets
and the necessity of external assistance could lead to
“substantially lower rating levels,” according to the report.